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contests in order to divert more than $13 million worth of grand prizes to co-conspirators.

Marketing exec arrested
Following a nationwide investigation, called operation "Final Answer," Jerome P. Jacobson, 58, a security director for the Lawrenceville, Ga., office of Simon Worldwide's Simon Marketing and seven other people were charged in U.S. District Court in Florida with conspiracy to commit mail fraud.

The investigation has lasted more than a year and drew on at least 15 FBI field offices. The conspiracy dates as far back as 1995. Executives close to McDonald's said the investigation has been active for two years, and that the company has been cooperating with law enforcement officials.

Network of 'recruiters'
The government alleged that Mr. Jacobson conspired with the others to supply the winning game pieces to a network of "recruiters" to solicit individuals to falsely claim they were

legitimate game winners. When the individuals received their prizes, the government said, they would share a portion with the recruiters, who in turn shared their take with Mr. Jacobson.

"This fraud scheme denied McDonald's customers a fair and equal chance of winning," said Attorney General John Ashcroft in a statement. "Those involved in this type of corruption will find out that breaking the law is no game."

$1 million cash prize
Mr. and Ms. Baker and Mr. Glomb allegedly acted as recruiters while Mr. Davis, Mr. Hoover and Ms. Phenis are accused of claiming prizes between $500,000 and $1 million from Monopoly and "Who Wants to be a Millionaire" games. Mr. Hughey allegedly acted as a recruiter and claimed a $1 million cash prize.

"There is no question we have been the victim of a sophisticated breach of trust by a senior person in a position of power at a longtime, trusted supplier," McDonald's Chairman-CEO Jack Greenberg said.

No current or former McDonald's employees or franchisees were connected to the promotions, the FBI said.

"Customer confidence is at the very heart of McDonald's business," Mr. Greenberg said. "We're determined that nothing gets between us and our customers, and we're outraged when anyone tries to breach that trust."

As a result, McDonald's is terminating its relationship with Simon Marketing, which develops game concepts, contracts the manufacturing suppliers and is responsible for game security.

Tumultuous changes
It was the latest in a series of tumultuous changes including the year-end sale of the Cyrk name and its catalog unit Corporate Promotions Group to private equity firm Rockridge Partners. Following the sale of CPG, Simon restructured and cut 40 jobs, amounting to two-thirds of its corporate headquarter's workforce. In May, the company formally changed its name to Simon Worldwide. Yucaipa Cos. holds a 20% stake in the company.

For the six months ended June 30, Simon posted a net loss of $19 million, nearly double that of the first half of 2000, when the company posted a net loss of $10.2 million.

Much of Simon's business is concentrated with McDonald's for its Happy Meals and Philip Morris for its Marlboro brands.

In addition, the company is the strategic marketing agent for Ty Inc. to provide design and development for various projects. Simon had had the exclusive rights to develop and market licensed Beanie Babies toys for the Beanie Babies Official Club until May 1999, when the arrangement was downsized.

Handshake deal
Outside of a two-year contract through December 2001 with McDonald's in Europe, Simon had been working with McDonald's and Philip Morris on a handshake.

"We do have a business relationship with Simon Marketing," said Billy Abshaw, manager of media programs at Philip Morris USA. "This is something that McDonald's and Simon have to work out. We cannot comment."

Officials at Simon declined to comment.

McDonald's has created an independent task force comprising anti-fraud and game security experts to review procedures for future promotions. McDonald's did not return phone calls seeking additional details.

New contest
The fast-food giant is also attempting to win back customer confidence with a five-day instant giveaway from Aug. 30 through Sept. 3. Consumers can win 55 cash prizes ranging from $100,000 to $1 million. The company will run newspaper ads strating Aug. 22, along with information on mcdonalds.com to explain the contest.

"McDonald's is committed to giving our customers a chance to win every dollar that has been stolen by this criminal ring," Mr. Greenberg said in the statement. "This initial $10 million giveaway is the first important step towards fulfilling this commitment. When the FBI concludes its investigation and ultimately determines the total amount stolen, we will announce plans to give our customers an opportunity to win any additional dollars taken."

It is unclear whether other clients have been affected or whether more suspects will be arrested. The Justice Department said it would "follow the investigation where ever it leads."